How and How Not to Help Start-Up India

It would be a pity if the government were to envisage the scheme as an extension of its normal patronage networkET Bureau | January 08, 2016, 11:06 IST

The Start-Up India, Stand-Up India programme of the government is most welcome. It has the potential to redefine the state’s economic role as enabler rather than as direct actor and to convert job seekers into job creators.

It would be a pity if the government were to envisage the scheme as an extension of its normal patronage network. So, drop any intention to offer tax and other benefits to young companies deemed eligible by venerable secretaries to the government.

Silicon Valley became Silicon Valley with a combination of, one, high-level government support for research at Stanford University, whose graduates were encouraged by professors and the success of their seniors to set up technology-based small businesses nearby, and, two, the offer of lucrative contracts to whoever from among these new businesses could fulfil the hi-tech needs of government procurement.

Such support is almost absent in India. This must be remedied. Yes, state agencies in the Valley did offer equity to new companies that already received equity from private investors, and the government offered tax benefits to investors in venture funds.

That was in an era when capital was still scarce, not in today’s world of a global savings glut, where investors lavish funds on favoured startups, which then act as if they have money to burn. Capital is not a binding constraint.

Sound ideas and the ability of investors to identify sound ideas are the constraints. Do not force banks to pony up risk capital. Let venture capital do its job, the state should stay away from its shoes. Tax concessions will only serve to make venture funding even more of a ‘spray and pray’ game. Government funds can be put to better use.

Stable electricity supply, efficient urbanisation that makes land cheap and rentals affordable, deep investment to upgrade school and college education and universalise healthcare, functional markets for labour and finance, besides government procurement not mediated by kickbacks - these form the support the government should provide startups.

This piece appeared as an editorial opinion in the print edition of The Economic Times.